LISBON, Oct 2 - The European Central Bank is widely expected to hold interest rates steady on Thursday, handing to its next president Jean-Claude Trichet the task of helping to guide a stubbornly weak European economy into shape. With manufacturing perking up and inflation quiet, the ECB can proclaim a very gradual recovery is at hand and needs no further help from credit easing for a number of months ahead. This would allow a graceful exit for ECB President Wim Duisenberg who steps down at the month's end after five years leading the world's second largest economy through the launch of new currency, stock market crashes and war. Entering the Lisbon Cultural Centre, where the ECB Governing Council is holding its last monetary policy session under his leadership, the Dutchman was asked how he felt. "Relief," he replied. "I'm sad, I have known him for 30 years," said Nout Wellink, ECB Governing Council member and head of the Dutch central bank. The ECB, which convenes twice yearly outside its Frankfurt headquarters, announces its rate decision at 1145 GMT, followed by Duisenberg's last monetary news conference at 1230 GMT.
EARLY SPRING
In recent weeks, most ECB policymakers have sent a stream of cautious assurances that green shoots of recovery are emerging in the 12-nation bloc and rates already at 50-year lows of 2.00 percent can nurture a gradual rebound. So financial markets and ECB watchers in a poll are unanimous in expecting no change in rates before Duisenberg retires on October 31 -- leaving his successor Bank of France Governor Jean-Claude Trichet the task of keeping stable prices and growth on track.
Too much is in upheaval in the European Union landscape for the traditionally cautious central bank to shift course now. The euro is roaring ahead, raising questions about the sustainability of recovery. Fiscal policy is in flux as France and Germany proceed with tax cuts while trying to fend off EU sanctions and wrestle their budget deficits below the EU's cap, set at three percent of GDP. "The ECB has basically said rates are on hold, partly because of concerns about fiscal policy and it is fairly confident of a gradual recovery starting," said Philip Chitty, European economist at ABN Amro in London.
PATCHY AT BEST
Fortunately, economic reports this week give succour to recovery hopes. Euro zone manufacturing eked out its first expansionary signals in eight months, with the purchasing managers' survey jumping above the critical 50 line to 50.1 in September, from 49.1 in August. Confidence is gradually improving in the region's largest economy, Germany, which has shrunk for two straight quarters. Consumer sentiment for October inched upward for the sixth straight month, and the IFO business indicator rose for the fifth month on brightening prospects for the future. Lending to businesses and individuals also is improving, a sign that activity and investment is poised for expansion. But recovery signs remain patchy at best. Retail sales in Germany are still declining. French consumer confidence in September was at lows registered in May. Accordingly, Duisenberg has given a guarded reading of the outlook. "Only in the second half of 2004, I regret to say at the earliest can we expect the European economy to grow again at its rate of potential output. But it will be a continuous process from now on," he said on September 13.
Some central bankers sound even less optimistic. ECB Executive Board Member Tommaso Padoa-Schioppa said growth in 2004 would be better but still very slow. Finland's Matti Vanhala said there is a risk of disappointingly low growth for the next two years. Despite that, they all have talked of interest rates as accommodative. What could change that scenario, however, is the euro currency, which has surged some seven percent since the last ECB meeting. If sustained, it would tighten monetary conditions and threaten an export-led recovery. German manufacturers and Chancellor Gerhard Schroeder already are squealing. So far ECB officials have remained calm about the currency, saying it has merely returned it to competitive levels. But that was before it began zooming toward its record high above $1.19 on Tuesday and Wednesday following weak U.S. economic data. Many ECB watchers say a sustained currency rise can only put rate cuts back on the ECB agenda.//